India’s growing economy is the third largest consumer, and the second largest importer, of oil globally, importing 80 per cent of its needs. Prior to the pandemic, India imported nearly 1.5 billion barrels of oil annually. While India’s oil consumption (and imports) fell during 2020-21 due to the pandemic, both are likely to resume its upward trajectory as the economy opens up. Given the high dependence on imported oil, the ongoing spike in oil prices, currently over $70 per barrel, is a cause for concern.
To secure its energy source, India can invest in overseas oil and gas fields. In the past, PSUs such as ONGC, Bharat Petroleum and Indian Oil invested in a number of oil and gas assets in Russia, Mozambique, Vietnam, Colombia, Venezuela, and Sudan. Some of these investments have faced issues due to instability in the host countries, be it in the form of civil strife, economic collapse and/or sanctions.
It is high time to shift course to safe sites in developed countries, and in particular oil-rich Organisation for Economic Co-operation and Development (OECD) countries like Canada, Norway and the U.S. So far, India has avoided these destinations because of the high valuations of their oil and gas assets. But India may be missing out on a boom. From 2009 to 2019, the maximum new oil production was not in Saudi Arabia or Venezuela or Nigeria but the U.S and Canada. India has a wide choice of OECD members to invest in, those which have significant scope for export of oil and gas — the U.S, Canada, Norway, Australia, and Israel.
Traditionally, Indian investments have been done through (a) PSUs which have (b) acquired direct stakes in assets. This was an acceptable government-to-government engagement in emerging markets such as Russia, where the state has a major role. However, the U.S and Canada have both placed restrictions on significant acquisitions by state-owned companies.
So, instead of acquiring and managing oil and gas assets directly, India can take a minority shareholding position in such companies.
During rising oil prices, the increased dividend payout will partly offset the burden of high prices. Second, these investments need not be made only by PSUs; they can be made via a sovereign wealth fund (SWF) just as Singapore’s Tamasek does.
As financial investors rather than acquirers, SWFs face fewer restrictions than do state-owned companies. Financial investors from all the five developing nations, including pension funds and SWFs, are already invested heavily in India. Reciprocal investments from India into these countries will be welcomed. These OECD countries routinely top the list of most transparent/least-corrupt nations globally and offer a safe investment avenue for India.
This is an opportune time for India to establish an SWF. Oil rich countries like Norway, the UAE, Kuwait and others set up SWFs to cushion against low oil prices. India is in exactly the opposite situation — low oil prices are good but high prices hurt. An SWF to cushion against high oil prices is in order.
The energy world has seen multiple upheavals in the past decade. In the past, India was a marginal player in the global energy market and was hurt by sharp price fluctuations. It is now a central player in the global oil trade and the ongoing trends favour it.
India must use the current window of moderate oil prices to reduce its vulnerability to price fluctuations and unfavourable geopolitical developments. It is imperative to take a broader approach than that allowed in the past, choosing a new type of investment — financial rather than physical — and targeting OECD rather than emerging markets.
This article was first published in The Hindu Business Line.
Amit Bhandari is Fellow, Energy and Environment Studies Programme, Gateway House.